One financial standard to protect consumers across the U.S.

As the House begins its Floor debate this week on financial regulatory reform, it is clear that the time is ripe for action.  In particular, the case for better consumer protection is clear: one cause of the financial crisis is that families took on mortgage or other debt obligations that they did not understand and they are now defaulting on the loans. One measure to address improved protection is a new Consumer Financial Protection Agency (CFPA).  If enacted, this new agency will have to balance the vital task of protecting the interests of consumers against the danger of a cumbersome regulatory framework that is too costly and that reduces options for consumers and small businesses.
In other consumer protection measures, Congress has usually acted to pre-empt state laws, so that businesses meet one federal standard and do not have to satisfy regulations that vary from state to state.  For example, the recent standards for lead in toys pre-empted state laws.  There are good reasons for national standards: they means that consumers are helped by a uniform set of rules if they move from one state to another.  If credit card companies, for example, had to explain different rules in each state, this would add unneeded complexity when the goal is to create greater transparency and ease of understanding.  And most people learn by experience, so that uniform rules would allow consumers to know that the protections they had become used to in one state would be the same in a new state.
Importantly, in the context of regulatory reform, having the same regulations in all states would also allow companies to operate more efficiently and take advantages of the large national U.S. market to keep costs down.  It would also help small banks in one state expand their market and offer services to customers in other states.  With competition, lower costs for companies will translate into lower fees or interest rates for consumers.  Having a large single market is generally considered to be one of the reasons for the long-run success of the U.S. economy.  Indeed, the European Union’s move towards a united economy has been motivated to a great extent by a desire to emulate this advantage. We should not cede the upper hand to Canada, Australia, Japan, China, and the EU nations that have already demonstrated the economic virtues of having one efficient national market.
As lawmakers have considered the CFPA, some proposed versions did not establish a true single market.  We are pleased to say, however, that a sensible compromise agreement has now been reached in the House on this issue.  As we work to create a strong, national consumer protection standard for our consumers, it is important that we preserve and extend a single market in financial services in the United States and we congratulate policymakers for taking an important step towards this goal.
Baily is a Senior Fellow at the Brookings Institution and was Chairman of the Council of Economic Advisers from 1999-2001.  Ludwig was Comptroller of the Currency from 1993-1998 and is founder and CEO of Promontory Financial Group